3D Systems is Still a Value Trap

I have been a 3D Systems (DDD) bear for almost a year now and in the meantime I have recommended investors to short the stocks many times. While the stock has fallen considerably from its all-time highs over $95, I still it is still a value trap. Despite the fact that 3D Systems is trading at nearly $12, I think the company is still not out of the water yet and should witness more downside in the coming months. Hence, I believe that investors should not bet on 3D Systems’ turnaround and should continue shorting the stock.

The primary reason why I think 3D Systems’ plunge will continue is the company’s business model.

3D Systems has acquired over 50 companies in the last three years in order to grow revenue. According to a Forbes report published in 2012, roughly half of the M&A deals fail. Given 3D Systems’ 50+ acquisitions in the last three years, I am sure that many of these deals will end up as failures due to the company’s inability to incorporate them into its core business.

3D Systems’ primary rival, Stratasys (SSYS), suffered a similar outcome earlier in February due to the company’s acquisition of MakerBot. Stratasys slashed its 2014 guidance because it had to book a write-down of $100 million to $110 million for its MakerBot business during the fourth quarter. As a result, Stratasys’ shares plunged 30% overnight and have been pushed into a downward spiral since then.

But the thing is, Stratasys had acquired less than five companies and was moderately successful in integrating them into its core business. I think 3D Systems is destined for a worse collapse as the company has acquired almost ten times as many companies as Stratasys. Given that the 3D printing bubble has burst, all of 3D Systems’ M&A would have lost a lot of value by now, and the company will have to book a big write-down in the near future.

The fact that 3D Systems has failed to provide guidance for FY2015 further highlights my concerns. The company’s management said it would offer guidance "when management has more clarity that sector conditions have stabilized."

Apart from the write-downs, I still think 3D Systems is overvalued. The company has a P/S ratio of 1.83, but given the flaws of 3D printing, I don’t think the industry’s valuation will grow any further. Besides, the company is facing competition from a lot of companies, and it will be very difficult for 3D Systems to maintain its place as the market leader.

Conclusion

3D Systems looks like a house of cards waiting for disaster. 3D Systems’ wild acquisition spree will likely come back to haunt the company in the near future and makes the stock a value trap. Moreover, given 3D Systems fundamental valuation and the increasing competition in the 3D printing market, I think the company will struggle to sustain growth. Thus, I think 3D Systems is still a nice short candidate.